Quora Answer: Should I Offer Board Positions to Large Investors?

The following is my answer to a Quora question: “I am planning a seed funding round in the near future.  Should I offer board member positions to large investors?”

An investor is not automatically qualified to manage a business.  There are three kinds of people required to make a business work: the one with the knowledge of the product or service, the one with the time or opportunity to manage the business, and the one with the funds.  Often, they are not all the same person.

Offering someone a position on the board means putting them in a position where they have some say in the running of the business, whether in daily management, or strategic direction.  Just because someone is able to put in large sums of money, does not mean he knows how to manage and grow the business.  If he could, he would not need to invest in your company.

Positions on the board are offered to people who have strategic value.  They may have access to certain markets; they may be there for optics, and prestige; they may be there because they have relevant experience.  They are not there because they put in money, or they are friends of yours.

Sometimes, large investors, particularly institutional investors, or professional investors, may negotiate for a representative on the board.  This may be a means for them to ensure that funds are spent in the growth of the business, and not excessively taken out as compensation to the founders.  This is especially so if the founders have a viable product or idea, but no management or financial experience.  In such a case, it is not a vote of confidence, and they may eventually take over the company and ease the misperforming founders out of executive management.

In such a case, it is not simply a case of offering investors a seat on the board, but putting in place a share structure that allows you to retain control of the business.  Both sides negotiate, and come to some compromise where their interests are largely addressed.